LEARNING OUTCOMES:

1. List the methods of public offer/sale of securities - Direct offer, offer for sale & placement.
2. Identify and list the steps and procedure involved in floatation of shares in the capital Market.
3. State the legal nature of collective investment schemes and their significant difference from shares and other form of investments.
4. List the procedure for creation and management of collective investment scheme.
5. Identify the roles of Solicitors in capital market transaction.

LESSON CONTENT:

1. Modes of public offer and sale of securities of –shares, debenture, GDR and bonds.
2. Steps and procedure for flotation of shares, debentures, GDR, bonds in the capital market.
3. Collective investment scheme/organs of collective investment scheme.
4. Procedure for creation and management of collective investment scheme.
5. Role of Solicitors in capital market transaction

 

Floatation of securities and collective investment schemes – pg197 ken’s notes

 

CAPITAL MARKETS 101 (PRACTICE AND PROCEDURE)

Floatation means how to offer the securities to the public.

Definition – the term “capital markets” refers to arrangements or facilities for the public trading in securities i.e. shares, debentures, Bonds etc.

When companies are in need of capital they go to capital market to raise capital. There are two types of capital – equity capital, debt capital

 

Importance of the capital markets

• Avenue for companies, governments and its agencies to raise capital
• Provides investment opportunities for interested public
• Provides opportunities for foreign investments
• Serves as a barometer of the economy – aid government’s analysis & aid decision making.

 

Applicable laws

• The companies and Allied Matters act
• The investment and securities act 2007
• The securities and Exchange Commission (consolidated) Rules 2013 [Amended 2017]
• Debt management office act
• The Nigerian stock exchange listing rules
• The FMDQ rules – they deal with debt capital, debt security

 

REGULATORY AGENCIES

 

 

The security and exchange commission – s 13 ISA 2007

This is the main regulatory authority for capital market transactions

Established

 

Strict compliance

Capital market transactions require the strictest adherence to the provisions

 

The capital market

 It is divided into two segments, namely:

• Primary capital market
• Secondary capital market

 

The primary market

Also called the “ investor market” or “aftermarket”

It provides an avenue for investors to buy and sell securities already issued ta the primary market. Could be organized (e.g. NSE) or disorganized (OTC e.g. FMDQ-OTC).

At the secondary market the forces of supply and demand play a huge role in the pricing of securities.

 

Dealing in the capital markets

Who can deal in capital markets?

• Only public companies can offer its securities – S 67 (1) ISA
• Private companies are prohibited – s 22(5) CAMA, S 67(2) ISA

 

Methods of offer of securities

The following methods are recognized modes of offer of securities to the public:

• Direct public offer/ offer for subscription
• Rights issue
• Bonus issue
• Private placement
• Offer for sale

These modes of offer only apply when the company is issuing the securities by itself, so only in the primary market

 

Direct public offer: the company offers its securities to the public, by means of a prospectus, through an issuing house.

Offer for sale: the company sells the whole issue of securities to an issuing house which in turn sells to the public at an increased price.

Underwriting is like an insurance for a public offer, so if an offer is not fully subscribed… in a direct public offer the company for sale approaches the underwriters, while in the offer for sale the issuing house approaches the underwriters.

 

Private placement

The company offers its securities not to the public at large but to specific or pre-arranged buyers.

N.B the role of an issuing house

• Can be utilized by both public and private companies
• SEC involvement in private placement by private companies – s 69(3) & 71 (2) ISA 2007
• Private placement by public companies: highly regulated – requires SEC approval. Whether SEC gets involves depends on whether it is offered to the public

 

Conditions for approval of private placement by plc’s – rule 340 SEC rules

1. Evidence of dire needs of fresh funds or technical expertise and proof that private placement is only viable option.
2. Notice of general publish in 2 newspapers and evidence of its given to SEC …
3. Offer should be to not more than 50 persons
4. Special resolution approving private placement should state quantity and price
5. The aggregate number of shares offered should not exceed 30% of the company’s issued and paid up capital
6. The price of the securities, if quoted shall be on technicalsuspension
7. The offer shall last for a period proposed by issuer and approved by commission but not to exceed 10 working days.

 

Rights issue

An issue of rights to existing shareholders that entitles them to buy, usually at a discount, additional shares in proportion to their existing holding within a fixed time period. This is way of the company raising money internally, it still issued to the same share holders the same shareholding is maintained. 

A Rights Circular is used not prospectus

 

Bonus issue

An issue of fully-paid up shares to existing shareholders based on their current proportions. In practice this is used when the company is short of cash and cant pay dividends 

 

Hybrid issue

Typically it involves the issue of securities both to the public and to existing shareholders.

Hybrid issue = rights issue + offer for sale/DPO

 

ELECTRONIC OFFER AND TRANSFER – *s55 ISA

• Companies are at liberty to opt for electronic modes of offering and transferring their securities
• Rule 345, SEC 2013

 

Registration of securities

All securities to be offered to the public by public companies, government and its agencies must be approved and registered with the securities and exchangecommission

 S 54(1) ISA ; RULE 279 SEC (CONSOLIDATED ) RULES 2013

 

Upon successful registration, SEC shall issue a certificate of registration in respect of securities – effective only in respect of those proposed to be issued.

 S 54 (3) ISA; rule 279 SEC (consolidated) rules 2013

 

Non-compliance

Criminal sanctions upon convictions: N1,000,000 or term of imprisonment

 

PROSPECTUS

This is a formal legal document issued and signed by directors of a public company, which introduces securities offered to the public.

Mandatory for every invitation to the public – s.82, ISA 2007

 

Some other documents can be accepted as prospectus are:

• ABRIDGED PROSPECTUS – rule 289 SEC rules
• DEEMED PROSPECTUS – S. 82(1) ISA 2007
• Statement in lieu of prospectus – s. 84 ISA & Rule 291 SEC rules

 

The publishing of a prospectus is the offer to the public, before you can publish a prospectus you must register it with SEC

Registration of a prospectus

Must be registered with SEC prior to its publication – s 80 (1) ISA

SEC shall not register a prospectus unless:

• Signed and dated as required by law
• Endorsed/ attached to it any specified documents
• Complies with requirements of ISA – s 80(4)

 

s 80(5) ISA 2007 – a company has within 21 days can appeal to the ISA where SEC refuses to register their prospectus although they have complied.

 

Contents of a prospectus

“ Every prospectus shall contain the information required by the third schedule to the act and shall in addition state the following…”

See Rule 288, SEC rules 2013

Note: rule 287(2) – “ red ink statements”

 

Liability for Mis-statements

• Any prospectus must not contain any untrue statements
• Persons involved in its preparation will be punished if it does
• The law imposes both civil and criminal liabilities

1. 79 (3) ISA 2007

 

Civil liability – s85 ISA

All persons who suffer loss as a result entitled to compensation payable by:

1. Any director at the time of the issue
2. Any person named as a director in the prospectus or as having agreed to become a director thereafter
3. Any employee who participated in its preparation
4. The issuing house and its principal officers

 

Criminal Liability – s 86 ISA

Any director or officer who authorized the issue is liable upon conviction to:

• N1, 000,000,000 and/or
• 3 years imprisonment

 

Statement in lieu of prospectus? Any person who authorized its delivery is criminally liable.

 

Liability of experts

Experts are liable ONLY for untrue statements or misstatements purported to be made by him as an expert.  They’re only liable for statements made by them in the course of their duty as experts

 

Procedure for issue

1. Prepare draft prospectus and have issuing house submit to NSE
2. Issuing house submits draft prospectus to SEC along with application to register securities
3. Print final copy of prospectus as approved by SEC
4. Obtain consents of experts
5. Print final copy and have it duly signed by directors
6. Submit printed prospectus with SEC for registration
7. Send approved prospectus to NE & CAC for record purposes
8. Publish prospectus

 

Assembling a team

In capital Market transactions, specialist professionals are involved in ensuring its success. They are:

• Capital market operators (“CMOs”)
• Capital market consultants (“CMCs”)

They must be registered with SEC before they can be used. see BLUE-CHIP ACQUISITION AND INVESTMENT V ZENITH BANK PLC (2007)  2 NISLR 69, also AB KASUNMU  V SEC 

 

Capital Market operators ( “CMOs”)

These are persons who facilitate the processes in capital market transactions. They include:

• Issuing house
• Stockbrokers
• Trustees
• Registrars: they issue bond certificate
• Securities Dealer

 

Capital market consultants (“CMCs”)

Professionals who render expert advice and whose opinion directly impacts on capital markets transactions. They include:

• Legalpractitioners
• Accountants
• Rating agencies
• Investment advisers
• Valuers
• Surveyors
• Engineers etc.

 

BONDS

INTRODUCTION

• Debt capital
• Issuer ( Borrower) & Holder (lender)
• Fixed- Income securities
• Alternative to taxation & Budget Deficit
• Registration with SEC is required – rule 564, SEC (rules) 2013

 

MAIN CHARACTERISTICS OF A BOND

• Face/par value – the nominal amount/value of a bond e.g. N 1,000,000
• Coupon rate: the interest rate to be paid annually on the face value. E.g. 10%
• Maturity date: the date when the face/par value of the bond is to be repaid. E.g. 1 year (12 months)

Note: Section 224(2) ISA

 

Types of bond

• Government bonds
• Corporate bonds

They are divided this way because of the person issuing the bonds.

 

Government bonds

These are bonds issues by governments, their agencies or wholly owned government agencies

They are usually issued to fund public projects and foster infrastructural development

 

Who can issue government bonds?

• Federal government and its agencies,
• State government and its agencies
• Federal capital territory and its agencies
• Local government;
• Wholly owned government companies

 

Registration of bonds

• Registration with SEC is required – rule 564 SEC rules 2013

 

Requirement for registration

Prospective issuers of government bonds are to apply for registration by completing the SEC form 6

Additional ….

 

 

STATE, FCT & LG’s

1. Duly completed SEC form 6 – application
2. Two copies of law authorizing the bond issue specifying the establishment of a sinking fund to be fully funded by CRFA of the issuer.
3. A copy of a rating report by an accredited rating agency registered by SEC
4. Details of sinking fund managed by trustee
5. Counterpart copy of irrevocable letter of authority to accountant-general of the federation authorizing deduction at source.
6. Letter of confirmation of receipt by accountant general of federation
7. Audited accounts for preceding five (5) years.

 

s 224(2) – cannot issue bonds more than 50% of income made last year

 

Government agencies/wholly owned companies

1. Duly completed SEC form 6 – application
2. Copy of the law/instrument establishing the agency/company authorizing issue of bonds.
3. Irrevocable letter of guarantee issued by government that owns agency / company
4. A copy of a rating report by an accredited rating agency registered by SEC

 

Boiler plate requirements

1. Two copies of draft prospectus &abridged prospectus
2. Two copies of underwriting agreement ( where applicable)
3. Projectfeasibility report
4. Draft trust deed

 

Federal government

“ The requirements of primary issues shall not apply, provided that where securities are to be traded on a securities exchange or capital trade point, they shall be subject to regulatory requirements relating to secondary markets”

• S 224(10) ISA

 

Conditions for issue

1. IGR of issuer shall not be less than 60% of its total revenue for preceding year
2. If not backed by a letter of standing order, shall be restricted to High net worth
3. …
4. Third-party guarantee by bank, financial institutions or any person recognized by SEC
5. A duly executed copy of third party guarantee to be lodged with trustee
6. ….

 

Corporate bonds

These are bonds issued by eligible companies as determined by the securities

 

Who can issue? Rule 567 SEC rules

• Public companies
• Foreign public companies, and
• Supranational bodies

Requirements for registration

7. Two copies of board/ company resolution ( whichever

 

• Where you’re borrowing above directors limit and 2) where its convertible

 

Conditions for approval

1. Absolute compliance with all regulatory requirements and conditions throughout tenor of bond

 

Modes of issue

1. Offer of subscription
2. Private placement

• Rights issue

 

GENERAL FUNCTIONS

1. Advise on status and legal capacity to transact
2. Advise on house- keeping duties
3. Due diligence
4. Make all statutory filings
5. File applications in court to support transactions ( where necessary- where SEC refuses to register )

 

 

COLLECTIVE INVESTMENT SCHEME

 

Definition

Investment and securities act, 2007 (“ISA”)

Securities and Exchange Commission Rules 2013, as Amended (“SEC Rules”)

- Section 152 – 195 Securities and Investment Act

 Section 153: it has to be two or more investors who contribute money for the purpose of acquiring and holding an asset.

 

S 160 (1) ISA -  says that no one should operate a scheme unless the scheme is authorized and registered at Securities Exchange Commission

161(1)

 

 

Types of CIS

Section 154(1) identifies three types of collective investment scheme:

• Unit trust scheme
• Open – ended investment company; or
• Real estate investment company or trust

 

S 154 (2) other scheme designated by SEC as CIS provided they are published in the gazette:

• Money market fund – Rules 468
• Islamic fund – Rules 484
• Fund of funds/ feeder funds – Rules 501

 

• Exchange traded fund – rule 543
• Venture capital fund – rules 555: it targets the young promising companies not
• Private Equity funds – rules 557: they are interests in existing companies that have potential for growth which the management has not been able to bring in enough returns. They are not interest in newly formed young companies
• Infrastructure fund – rules on infrastructure fund
• Community savings scheme
• Investment trust scheme: this is similar to the unit trust scheme however the investment is more streamlined e.g. so they can say they don’t want to invests in cocoa

They all have different investment objectives. So when you see a particular fund ask what is their investment objectives

 

Closed means that at the time of issuing the unit you can no longer issue units

Open – once you raise the initial public offering, you can continue to issue units.

 

Unit Trust Scheme

Sections 152, 154 (1)(a) , Rules 459 – 467

Means any arrangement made for the purpose, or having the effect of proving facilities for the participation

 

Open- Ended Investment company

 

Section 192 of ISA

To be registered by the SEC if:

• Body corporate incorporated under CAMA
• Has capital and reserve as prescribed by the SEC

 

 Real estate investment scheme (“REIS”)

• Sections 193,194 of ISA, Rules 508 – 542
• The REIS can be constituted as a company or a trust
• To be registered with the SEC if:
• …..

 

s 193(1) ISA –  Real estate investment scheme

• A body corporate incorporated for the sole purpose of acquiring intermediate or long term interests in real estate or property development.
• May raise funds from the capital market through the issuance of securities.
• Characteristics of securities are:
• An income certificate giving the investor a right to a share of the income of any property or property development; and
• An ordinary share in the body corporate giving the investor voting rights in the management of that body corporate

 

Real Estate investment Trust – sec. 193(2),(3)

A trust may be constituted for the purpose of acquiring a property

Two alternatives:

• The investors are to acquire units in the trust through which

 

Required documentation at the SEC

Prospectus – Rules 512, 513, 514,515 (for REIC), and 531, 532 (for REIT)

• Note content of a prospectus

 

Registration of a Scheme

Upon application to register a CIS, the SEC may authorize and register the scheme

 

 

Where a scheme fails to comply with the provision of the ISA the SEC can refuse to register it – s 160 (3) ISA

 

Revocation of a scheme

Sections 163 ISA

Grounds for revocation are:

• There is contravention of any provision of the ISA or Rules (in respect to CIS)
• SEC

 

Organs/ Participants

• Holder/ unit holder
• Manager/fund manager/ portfolio

 

Trustee

Section 152, 178, 179, 180,181 of ISA , rules 109

 

Duties of trustees

Section 181 of ISA

• note termination

 

Custodian

S 152, 7

Shareholder

Unlike the trustee the custodian can be a registered financial institution.

There is emphasis on independence of the custodian in relation to the manager – s 179 ISA 

 

Holder / Unit Holder/ Investor

Section 152 of ISA

 

Different classes of investors /unit holders

The new rules

Retail investor – less than N100,000,000 naira in assets

High net worth investors – more than N100,000,000 naira in assets

 

Fund / portfolio manager – s 158

This is the main person in charge deciding what should be invested in. the fund manger as to be as an SEC registered. The fund manager has to be an incorporated body.

Duties and functions of Fund manager

Section 155 of ISA

Administer the CIS

• Honestly and fairly
• Skill, care, and diligence; and

 

Investment of CIS

Section 171 of ISA

• To be invested by a manager in accordance with the provision of the trust deed or custodial agreement with the objectives of safety and maintenance of fair returns on amount invested
• Section 171(2) – permitted investments
• Section 171(4), rules 3.2 (SEC rules – Retail Investor Restriction)

 

Note the difference between the unit holders holding the unit in a scheme and shareholders in a company. Note that SEC rules have tried to protect the retail investment.

 

Note the foregoing powers of the SEC in relation to CIS:

• AUTHORISATION AND REGISTARTION of a CIS – section 160 of ISA
• Revocation of a CIS – section 163 of ISA
• Investigation of person involve in administration of CIS (Manager) – section 172 & 173 of ISA
• Request an audit of a manger – s 176 of ISA
• Intervention – section 190 of ISA
• Registration of the manger, trustee, custodian – section 178(2) of ISA

 

 

CLASS ACTIVITY I

“Mavis Abada, Emeka Monyei and Efe Iluezi-Ogbaudu are interested in raising capital for Adebiyi Nigerian limited to construct an ultra-modern 3D cinema”

1. Advise them on options available.

Private placement, issue debentures and place a charge on some of their assets, re-register as a public company

2. Would your answer be different if Eti-osa LGA intends to construct a 4^th mainland Bright?
3. Distinguish between the options identified in Q.1 and Q.2
4. Comment on 5 options as to names available to Mavis, Emeka and Efe assuming they intend to float a laundry business without registration

 

CLASS ACTIVITY II

“Adebiyi Nigeria limited intends to upgrade its business frontiers by increasing share capital from 1 million to 5 million”

1. Comment on the procedure to be followed in this respect
2. List the documents necessary (if any) to be submitted to CAC to actualize the above
3. Draft the required resolution in respect of the increment.